The Market Today
Fed Decision Ahead
by Craig Dismuke, Dudley Carter
Mortgage Applications Hit by Higher Rates: Mortgage applications fell 7.1% for the week ending January 21 as mortgage rates continued to depress refinance activity. The average 30-year mortgage rate rose another 8 bps to 3.72%. The average mortgage rate was 3.71% in the last week of January 2020, before the pandemic. Refi apps fell 12.6% for the week and are now down 56% from the beginning of last year. Purchase applications were down 1.8% WoW but are only down 11.5% from January 2021.
Imports Continue to Outpace Exports as Trade Weighs on GDP: The Advanced Goods trade data showed the goods deficit surprisingly increased again, up $3.0b to $101.0b, the largest monthly goods deficit on record. Imports rose 2.0% while exports gained 1.4%. The December results brought the trailing 12-month goods deficit to $1.086t, the largest on record. On a positive note, overall trade rose 1.8% MoM and is now up 21% from its pre-COVID-19 level.
Replenishing of Inventories to Boost GDP: December’s nominal inventories data were considerably stronger than expected with the inventory rebuild projected to make a positive contribution to 4Q GDP. Wholesale inventories rose 2.1% MoM versus expectations for a 1.2% increase. Retail inventories, meanwhile, jumped 4.4% versus expectations for a 1.5% increase. Motor vehicle and parts inventories jumped again, for a second consecutive month, and are now up 11.3% (from a low level) since October. Even excluding the auto sector, the reports show more broad momentum in the rebuilding of inventories.
Fed Policy Decision Amid Inflation Pressure and Heightened Market Volatility: The Fed is scheduled to make policy decision today at 1:00 p.m. CT followed by a press conference with Chair Powell at 1:30 p.m. The general consensus has evolved to expect a foreshadowing of a rate hike in March. After some hawkish Fedspeak two weeks ago, Chair Powell is expected to raise the possibility of four hikes in 2022 (up from three in their December SEP). After a barrage of criticism that they are behind the curve on inflation, there are mixed opinions on if officials would be comfortable ending asset purchases more abruptly than tapering through March. Thus far, officials have deferred to financial market stability at the expense of inflation-fighting credibility.
OTHER ECONOMIC NEWS
Consumer Confidence Slips Less Than Expected on Sanguine Current Assessment: Consumer confidence held up better than expected in early January according to the Conference Board’s latest update. Overall sentiment declined from 115.2 to 113.8, a better result than the 111.2 economists had penciled in, on divergent results for the current assessment and future expectations. The present situation index improved from 144.8 to a five-month high of 148.2. A stronger assessment of business conditions offset a slightly weaker reading on the labor market, although the labor market differential remained elevated near the top end of its historical range. Looking ahead, the expectations index fell from 95.4 to 90.8 on a weaker outlook for business conditions, employment, and income growth. Despite the reported decline in optimism, plans to purchase autos, appliances, and homes (to the highest level since a data break in 2010) all increased from December. While still elevated, inflation expectations for the next 12 months edged lower for a second month.
Richmond Fed Manufacturing Index Disappoints: The Richmond Fed’s Manufacturing Index fell more than anticipated in January from 16 to 8, a four-month low and the second weakest reading since the first half of 2020. Current shipments improved but orders fell to near the bottom of the recent range and employment declined to its weakest level since July 2020. Supplier delivery delays worsened after significant improvement late last year and indices tracking prices paid and received inched up to new record highs. The forward-looking metrics provided little solace as activity and employment indicators softened amid expectations for continued supply bottlenecks and inflation pressures. Reports last week from the New York (weaker) and Philadelphia (stronger) Fed Banks were mixed.
Commerce Department Study Indicates Chip Shortage to Persist: The U.S. Commerce Department released the results of research into the dynamics behind the global chip shortage that has disrupted multiple industries, including the auto sector. The report noted strong demand collided with “a series of black swan events such as factory fires, winter storms, energy shortages, and COVID-19-related shutdowns” to drive the severe shortage of chips. As the world economy enters the third year of the pandemic, “the semiconductor supply chain remains fragile” and “demand continues to far outstrip supply.” Based on responses from more than 150 businesses within the chip industry, the report noted the “median demand for chips highlighted by buyers was as much as 17% higher in 2021 than 2019” while “median inventory of semiconductor products highlighted by buyers has fallen from 40 days in 2019 to less than 5 days in 2021.” The persistent mismatch has occurred despite semiconductor plants operating at historically high capacity rates of more than 90%, according to the report, and “respondents did not see the problem going away in the next six months.”
Treasury Yields Remain Relatively Stable as Stocks Swing Widely for a Second Day: The battle between the equity bulls and bears moved into the second round on Tuesday as market volatility persisted amid elevated uncertainties and ahead of this afternoon’s Fed decision. As was the case Monday, the bears landed some confidence-draining jabs early that pushed the S&P 500 down as much as 2.8%. The bulls again fought back in the afternoon, sending the Dow and S&P 500 briefly into positive territory. Tuesday’s outcome, however, would prove to be a draw. After falling back in the final hour of trading, the S&P 500 ended 1.2% lower and near the middle of its daily range, taking its decline for 2022 to 8.6%. The Nasdaq slid 2.3% after tumbling by as much as 3.2%, growing its year-to-date deficit to 13.5%. Treasury yields flipped between gains and losses as equities fluctuated but were again comparatively calm. The 2-year yield rose 1.2 bps to 1.02% while the 10-year yield inched 0.2 bps lower to 1.77%. The 5-year yield added 0.7 bps to 1.55%, despite a notably strong auction of 5-year notes. The $55 billion auction stopped through with an above-average bid-to-cover ratio and record-low award for primary dealers.
The large equity swings failed to slow Wednesday even as the Fed’s afternoon decision looms. While Asian markets were mixed, U.S. futures were solidly higher before 7 a.m. CT alongside a sharp gain for European indices. The Stoxx Europe 600 rallied more than 2% and was at session highs, cutting further into Monday’s 3.8% plunge. The broad-based sector strength was also evident in pre-market gains for U.S. futures that pushed the Nasdaq up just under 2% and the Dow nearly 1% higher. The S&P 500 gained 1.3%. The risk recovery was matched with a broad rise in sovereign yields. At 7:15 a.m. CT, the 2-year yield was 1.6 bps higher at 1.03% while the 10-year yield added 1.4 bps to 1.78%. The 5-year yield rose 2.1 bps to 1.58%.